Finance Concepts

Finance Concepts

Week One

Jason A Taylor

University of Phoenix

FIN/571

July 10, 2010

Finance Concepts

Guillermo’s Furniture has been a successful manufacturer of quality furniture for many years. This changed “in the 1990s when two forces combined to cause a large dent in his business. First, a new competitor from overseas entered the furniture market. Using a high-tech approach, this foreign competition provided furniture to exact specifications and did so with rock-bottom prices. Second, the sleepy communities in Sonora woke up,” (Guillermo Scenario) causing labor costs to rise. Several finance concepts arose from the issues Guillermo faced. These concepts include the principles of incremental benefits, diversification, and business ethics.

Incremental Benefits

The change in the landscape of Guillermo’s business practices caused the principal of incremental benefits to come under observation. “The Principle of Incremental Benefits says the value derived from choosing a particular alternative is determined by the net extra—that is, incremental—benefit the decision provides compared with its alternative. The incremental costs and benefits are those that would occur with a particular course of action but would not occur without that course of action” (Emery, Finnerty, & Stowe, 2007, p. 26).

Guillermo’s president must decide if he wants to convert to a more technology based production model. “The cost of the technology is immense, as is the reduction in the labor needed for production. In addition, the production can move between products quickly, and it runs on a 24-hour basis, as the shift-differentials are more than offset by the reduction in labor” (Guillermo Scenario). If the decision is to use automated technology doing so is the course of action. An incremental benefit from this is a significant decrease in labor costs. This particular incremental benefit will not occur if the action is not taken. Managers must weigh the...